Fed’s climate risk guidance splits governors

The US Federal Reserve asked for public comment on a framework for assessing climate change risks in the banking sector on December 2. But the proposals faced resistance from two of the Fed’s top executives.

“I cannot support this issuance of guidance on climate change,” said governor Christopher Waller in a statement published alongside the main report. “Climate change is real, but I disagree with the premise that it poses a serious risk to the safety and soundness of large banks and the financial stability of the United States.”

“I believe it is critical,” said governor Michelle Bowman in her own statement, “that the board consider the costs and benefits of any new expectations.”

“While I support seeking public comment, this vote does not indicate my support for the finalisation of this guidance,” she added.

The principles apply only to large banks, with more than $100 billion dollars in assets. The Fed said the guidance addresses both physical and transition risks from climate change.

In contrast to the two governors’ reservations, the Fed’s proposals express no doubts on the need to address climate risks. “The financial impacts that result from the economic effects of climate change and the transition to a lower-carbon economy pose an emerging risk to the safety and soundness of financial institutions and the financial stability of the United States.”

The six principles the Fed outlined cover governance; policies, procedures and limits; strategic planning; risk management; data, risk measurement and reporting; and scenario analysis.

“Sound governance by the board should include allocating appropriate resources to support climate-related financial risk management,” the guidelines say. Banks should also ensure clear lines of communication. Bank boards “should assign accountability” for climate risks within their organisations.

The Fed proposes banks should incorporate financial risks into their policies and strategic planning, including their capital plans. It said public comments on climate risk should reflect the banks’ internal thinking.

Banks should develop ways to measure and assess climate risks, says the guidance, while internal controls and auditing should incorporate climate risk.

“Sound climate-related financial risk management depends on the availability of timely, accurate, consistent, complete, and relevant data,” says the guidance. “Management should incorporate climate-related financial risk information into the financial institution’s internal reporting, monitoring and escalation processes.”

Banks should conduct climate scenario analysis including “extreme but plausible scenarios” which should be “subject to oversight, validation, and quality control standards”. They should also monitor how climate change affects liquidity, credit, interest rate, market pricing, legal and operational risks.